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2/3/2019

935 days left

Amgen deep dive – Price target: $250 per share – 6% discount rate – 1% reinvestment/ROIC rate, -1% at maturity in 2030-2035 – no buy/sell recommendation
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Well, I’ve been following Amgen since I was a teenager. Their evolution into one of the largest biopharmaceutical companies is an instructive one. One general theme emerges: business and manufacturing excellence slightly outweighed a poor R&D and M&A record to record reasonable investor returns. The strategy going forward will be outlined here, and while intruiging, I only believe the stock is slightly undervalued (within the margin of error). With my sometimes too conservative estimates, however, one might be tempted to buy.

Enbrel — $5.0b in 2018, $4.5-4.1-3.7-3.3-1.5 billion estimates for ’19-’20-’21-’22-’30
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Acquired via Immunex in 2003 (if my memory serves), Enbrel has come a long way from the $750 million supply constraint challenges and partial American Home Products (AHP became Wyeth, which Pfizer acquired) ownership. Peaking recently, Enbrel had defied gravity along with Humira, but the TNFalpha era is ending. With drugs like Cosentyx, Stelara and many more superior autoimmune drugs, very few new starts will be seen for TNFs, especially Enbrel and Remicade (inferior dosing schedules). Writing a NRx of Enbrel for, say, psoriasis, is basically malpractice. Of course, the rule I’ve observed for a decade will apply: current patients who are happy will not switch. So, we will see a slow melt. Recall Amgen books US revenue, so there is no EU biosimilar impact. There is no US biosimilar, despite the Sandoz filing, and Amgen even considers Enbrel to be IP-protected. I disagree and expect within 5 years or so a true biosimilar will emerge. Still, the atrophy will be slow. Amgen wisely wholly owns devices such as SureClick which are advanced administration devices that might hold share (see OnPro). What is a bit more surprising is Amgen’s inability to develop any other autoimmune medicines to replace Enbrel. It appears they forgot about this field: while AbbVie and J&J were busy replacing their older franchises, Amgen stayed quiet and let JAK, IL-6 IL-12, IL-4 (they were early here, too!), IL-23, and more pass them by. All we have left that’s even close is tezepelumab with AZ. Poor R&D and BD&L/strategy management strikes again.

Neulasta — $4.5b in 2018, $4.0-2.8-2.0-1.8-0.9 billion are my estimates for ’19-20-21-22-30
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Not much to say on this very old product. Several biosimilars are in market with several more coming. “OnPro’, a particularly neat device, represents 60% of Neulasta right now. Again, a fairly bright S&M managerial move to extend this franchise. Payors may allow use of OnPro over a biosimilar and it gives Amgen managed markets a chance to pitch their story, which is one of the few ones that is believable. Even Mylan notes their market share relative to the long-acting market EXCLUDING this drug-device, which suggests this market is already bifurcated in some ways. Amgen has a long history of matching price against J&J in the EPO category, so expect them to battle “account for account” as they’ve said. Despite all this, I expect a big shrink in sales as OnPro only slows a complete implosion. I do think biosimilars get bigger and bigger share in the coming years.

Prolia — $2.3b in 2018, $2.5-2.7-2.9-3.1-3.2-1.6 are my estimates for ’19-20-21-22-23-30
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Denosumab is probably the most important asset to Amgen right now. After all, Enbrel and Neulasta are yesterday’s news. Prolia/Xgeva is not exactly a new drug, but I think there is more growth here. Amgen recently said they’ve penetrated 25% of the osteoporosis market. I think that’s a lot and actually is bearish relative to my prior expectations. This is a low-priced, mass-market product, which we will discuss as a theme momentarily. Most of these kinds of products don’t get to see 50-75% penetration that we see in other fields. There is a lot of inertia in medicine–even cancer patients resist treatment. So despite the impressive continued growth of Prolia, we will probably see a ceiling in a few years.

Far more important is IP. Now, Amgen is the IP king of biotech. Despite that, notice the 7718776 patent which expires in 2023 (at best 2028). OPG (now known as RANKL) is an old idea. Amgen played with these molecules for a very long time before denosumab came to light. I would not be surprised if biosimilar companies like Celltrion, Samsung and others start talking up denosumab as a pipeline opportunity in the next few years. Keep in mind there is no “Orange Book” for biologics. There is a “Purple Book” but it does not list patents.

Xgeva — $1.8b in 2018, $1.9-1.9-2.0-2.0-1.0 are my estimates for ’19-20-21-22-30
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The same IP situation applies to Xgeva as Prolia. Beware that this product will not last forever.
The Xgeva oncology indications should saturate more quickly than Prolia, and I believe they have, even though decent growth numbers continue. Better and better underlying drugs may prevent metastasis and you may even see the drug start to shrink in a few years.

Aranesp — $1.9b in 2018, $1.7-1.5-1.2-1.0-0.6 are my estimates for ’19-20-21-22-30
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Not much to say here as this product has become less important. Interestingly, given the lower sales, this is less of a target for large numbers of biosimilars. The same dynamic may apply to Epogen and Neulasta, which are very tiny, and inferior products, but will still be stickier than products with biosimilar risk. Vifor is the branded competition here.

Aimovig — $117m in 2018, $510m-850-1100-1265-1328-1869m are my estimates for ’19-20-21-22-23-30
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My numbers are conservative. The drug is off to a fast start. This is another low price-large number of patients market which strategically diversifies Amgen from the rest of the industry. Amgen is acting more like pharma and pharma is acting more like biotech. I think Amgen may be smart here, targeting markets they basically have to themselves: osteoporosis, migraine, obesity, cardiovascular. These are forsaken lands compared to cancer and they may just do well employing this strategy.
Aimovig clinical data sucks, the whole class is meekly efficacious. Amgen has at least two other migraine compounds, however. My numbers may be a tad conservative, still. If you are a big CGRP believer, this could be the next massive class with several $5 billion products. I don’t see it–maybe I can see it getting to $2 or $3 billion. Keep in mind Novartis gets something.

Repatha — $550m in 2018, $696m-974-1267-1520-1824-1915-2100 are my estimates for ’19-20-21-22-23-24-30
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Another low-price, large-market drug in a not-so-crowded area. I see Repata doing well, but new entrants are coming from ESPR and AMRN also makes things tricky. There are millions of addressable patients and my numbers might be VERY conservative, which is a little hard to believe for a $550 million drug forecast to become a $2.1 billion drug. I wouldn’t be shocked if Repatha could hit $5 billion or more in peak sales.

omecamtiv — Poor sales for Entresto keep me on the sidelines here. The RP deal was a bit insane.

Evenity — launching soon
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I only see $1 billion peak sales here. If you look at the data for Prolia, it is very rare to have a fracture on Prolia + bisposphonates. If you really need Evenity you are a rare treatment-resistant osteoporosis patient. It will be interesting to see how they price this drug as well. With a potential black box on cardiovascular, and Amgen not particularly enthused body language, I think $1 billion is fair for now. UCB gets a chunk here, too.

Krypolis — Only thing to note here is the relatively near-term LOE. The composition of matter goes in 2025. This is NOT a biologic. The Onyx deal is a wash–a lot of people don’t know they get a decent royalty on Pfizer’s mega-blockbuster palbociclib.

Biosimilars — $1b in 2025 and $1.8b in 2030
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My forecasts are conservative. Amgen has the best execution in biologics manufacturing and may just sell $5 or $10 billion in biosimilars with time. This is a brilliant strategic decision by them despite early softness in biosimilars. It’s also a very smart hedge for their business.

tezepelumab – 2030 estimate of $1.0b — AZ partnership
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Probably the most exciting drug in a meek pipeline. Risks are to the upside of my estimates.

Various R&D comments
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Amgen is still a poor research company. Look at the oncology targets: CD19, BCMA, DLL3, MCL1, PSMA, KRAS. Zero originality here. Decent execution with AMG510, which may be huge, shows some better performance on delivering drugs but creativity is what you need in R&D. Completely absence from PDL1 or CTLA4 is telling. I don’t trust BITEs and think the CD3 affinity doesn’t get you anything special. Look at how poorly Blincyto compares to Kymriah. I don’t see BCMA holding up over the long haul either.

With obesity targets like AMG598 and cardiovascular targets like AMG890, Amgen is being creative with the return-to-large markets hypothesis that other companies are abandoning. “Zig when they zag?” I like it.

Valuation
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I assume zero R&D cost after 2019 and no new drugs other than a small handful. I discount cash flows at 6% (similar method for CELG with a 6.5% discount there) and assume they reinvest accumulated cash for a return of 1%. I assume maturity in 2030 or 2035 and cash flow declines at 1% per annum then. SGA is 25% of revenue and COGS are around 12% of revenue. Cash flow and net income are the same here. All this yields the slight upside of $250 per share. Holding this framework constant across the industry (while changing discount rate, reinvestment risk and maturity to reflect portfolio risk, management intellect and industry conditions) has served me well.

Biopharma/Investing
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I was told Munger and Buffett refer to other “value” investors as “groupies” and joke about their poor performance. Buffett clones and Graham/Dodders are often poorly mimicking 50s-70s stock-picker Buffett without the same comforts: cash flow, no LPs, etc. That may have worked for a few years, or in an up-only market, but this strategy was never meant for public hedge funds.

Papers I’ve Read
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Marine n-3 Fatty Acids and Prevention of Cardiovascular Disease and Cancer. Manson et al. NEJM 2018.
Vitamin D Supplements and Prevention of Cancer and Cardiovascular Disease. Manson et al. NEJM 2018.
Well, cancel all your vitamins, they don’t do anything. p=0.24 and p=0.47 should clear your medicine cabinet of at least two worthless drugs. The only question is do these “supplements” (code word for “non-useful medicine”) help a certain cohort of patients as opposed to all-comers. Subsets are hypothesis-generating, at best, and I don’t see a clear trend other than omega-3s helping patients at serious pre-existing CV risk (already well-known).

Book Review – The Cartel by “Ashley” and “Jaquavis”
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This “hood book” is touted as the epitome of the genre. “Urban” fiction is usually written in a mix of street slang and proper (mostly) English, and typically draws on life in the milieu of poverty, drugs and crime. The Cartel is a bit different, taking us inside the fictitious Diamond family, who dominates the Miami drug trade. While not quite as suspenseful as Patterson, The Cartel features fairly intimate character portrayals that clearly connect with the reader. The fanciful plot is a bit far-fetched at times, but this is fairly typical in the genre. Still, I enjoy my ‘hood books’ when they’re as gritty and reflect the downtrodden grime that comes with the reality of the streets. The Cartel glamorizes drug trafficking, to an extent, suggesting that there is a path to wealth and legal success. While truth can be stranger than fiction (look for my next review), the inane focus on branding and the appearance of wealth drowns an otherwise reasonable plot. If you’re looking for your first ‘hood book’, try Good2Go Publishing. For the curious, it is all some of us practically read in here. If you’re still confused, think the book version of the film “Belly”.

Irrelevant, but I just learned about margin trading and am somewhat frustrated I wasn’t informed sooner, but very glad I had more research under my belt and previously thought trading profit on a 30% loan was my only near term option. Glad I risked my own money and learned later. I also hope you get out soon Martin, you showed me opportunities I couldn’t be happier about. The feeling of financial freedom carries a heavy weight, and now acquiring income is a stones throw away for me. Thank you…

Glad to see positive messages for a while. I mean he knew which drugs were good when he bought and raised prices on them. Him getting a hand on these drugs was a recognition of their true value. Function of capacity and competition.

Those that followed MS were proven ample that foundation is in science and what works. On top of that brilliant mind. He was ahead of the big pharma guys and they got pissed he took away their business. Public doesn’t understand. Big pharma knows exactly what’s up. They all worked with or for him.

Mental capacity as far as understanding value in biotech and pharma. He was so quick that people didn’t know what hit them because all of a sudden these drugs are worth more. Well that’s why he bought them out right. But he didn’t go to jail for that. It was some sort of transaction that should have been handled by an experienced controller. But he was too brilliant and noticeable so they pointed fingers and then it just snowballed. Hope society gets him back soon.

The raising in prices was a function of him being ahead of the competition. The big guys would have done the same. They all about profits. This is the mental defect perception. Kind of like saying utility companies are not doing profits and providing a basic human right. It cost money . But nobody goes after them the same way let’s say. It’s a convoluted notion. I think there is a couple of layers happening here. Some of it is his personna.